Recent Bankruptcy Decisions from the Appellate Courts - April 2006



Reprinted from the Norton Bankruptcy Law Adviser, with permission of Thomson/West.


In re Nash
--- F.3d ----, 2006 WL 1085550 (1st Cir. April 26, 2006)
Holding:  Debtor failed to prove undue hardship sufficient to entitle her to a discharge of student loans pursuant to § 523(a)(8), where her assertion of a bipolar-related disability was not accompanied by medical testimony regarding her future medical outlook and future earning potential.

Marrama v. Citizens Bank (In re Marrama)
--- F.3d ----, 2006 WL 1028771 (1st Cir. Apr. 20, 2006)
Holding:  Bankruptcy Court did not err in granting summary judgment that debtor should be denied a discharge because he transferred assets to defraud creditors in violation of § 727(a)(2)(A).  Debtor's invocation of Fifth Amendment did not require inference in Debtor's favor at summary judgment, where there was lack of any evidence to contravert substantial indicia of Debtor's intent to defraud creditors.


Pension Transfer Corp. v. Beneficiaries Under the Third Amendment to Fruehauf Trailer Corp. Ret. Plan No. 003 (In re Fruehauf Trailer Corp.)
--- F.3d ----, 2006 WL 933404 (3d Cir. Apr. 12, 2006)
Holding:  Plaintiff in a fraudulent transfer proceeding need not prove the precise value of the property received or relinquished when the totality of the circumstances establishes that the values are certainly not equivalent.  Although the debtor received some immeasurable benefit from an amendment to its pension plan funded by pension surpluses, that benefit was not reasonably equivalent to the cost of the amendment, and the amendment was a fraudulent transfer.


In re Rare Earth Minerals
--- F.3d ----, 2006 WL 998078 (4th Cir. Apr 18, 2006)
Holding:   Appeal of assumption and sale of oil and gas lease was moot pursuant to § 363(m) after sale to good-faith purchaser and failure of appellant to obtain stay.  Mootness was not defeated by appellant's claim that lease was not property of the estate pursuant to state law, or by appellant's late-raised claim that purchase was not in good faith due to prior recorded interests in lease.


In re Oswalt
--- F.3d ----, 2006 WL 1030362 (6th Cir. April 20, 2006)
Holding:   Michigan legislature's postpetition amendment of Michigan Mobile Home Commission Act (MMHCA) precluded the avoidance of a creditor's security interest in the debtor's mobile home.  The creditor had recorded a traditional mortgage lien, and the lien was not noted on the mobile home's title.  The Sixth Circuit had previously ruled that under Michigan law a security interest in a mobile home could be perfected only by a lien noted on the title.  After the filing of the debtor's bankruptcy petition, the Michigan legislature amended the MMHCA to state that a lien in a mobile home could be perfected by a traditional mortgage lien, and it gave the amendment retroactive effect.  The Sixth Circuit ruled that the post-petition statutory amendment clarified the legislature's intent regarding the MMHCA, and thus its application to the creditor's pre-petition lien was appropriate.


Hower v. Molding Sys. Eng'g Corp. (In re Molding Sys. Eng'g Corp.)
--- F.3d ----, 2006 WL 1008838 (7th Cir. Apr. 19, 2006)
Holding:  Bankruptcy Court did not err in lifting stay, pursuant to Rule 6004(g), of order authorizing sale of Debtor’s assets.  The circumstances were unusually exigent – the Debtor had five dollars in its coffers, it had dozens of full-time employees and a payroll to meet, the purchaser offered to make $250,000 available to keep operations going, the trustee and secured creditors approved of the sale and the party opposing the sale had a slim chance of prevailing on appeal, despite indicia of bad faith.  Since the sale occurred immediately following entry of the sale order, the appeal of the sale order was moot.


In re Benn
--- F.3d ----, 2006 WL 870750 (B.A.P. 8th Cir. Apr. 6, 2006)
Holding:  When the petition is filed before the end of the tax year, the debtor’s federal and state tax refunds are exempt under Missouri law.  Missouri’s state exemptions include all property that is exempt from attachment and execution under Missouri law.  Any debt that is contingent is exempt from attachment and execution, and since these refunds were contingent and uncertain on the petition date, they are exempt from attachment and execution and, thus, exempt assets.  Moreover, the Internal Revenue Code restricts garnishment of federal refunds to those by federal agencies and those for certain support obligations. 


In re Nys
--- F.3d ----, 2006 WL 1084349 (9th Cir. April 26, 2006)
Holding:  For discharge of student loans debt pursuant to § 523(a)(8), the debtor’s mere inability to pay in the present and a likely inability to pay in the future are sufficient to constitute “exceptional circumstances”  required by second prong of Brunner undue hardship test.

Norfolk S. Ry. Co. v. Consolidated Freightways Corp. (In re Consolidated Freightways Corp.)
--- F.3d ----, 2006 WL 903230 (9th Cir. Apr. 10, 2006)
Holding:  There is no federal interline trust doctrine that a creditor can use to recover in bankruptcy funds paid to the debtor pre-petition.  “Interlining” occurs when multiple freight carriers transport goods under a single bill of lading, with one carrier collecting payment for the entire shipment and paying the carriers as appropriate from those proceeds.  Debtor had received payments that were owed to Norfolk for pre-petition shipments.  Norfolk argued that the debtor was holding the funds in trust for Norfolk under the interline trust doctrine, that the funds were not part of the estate and that the funds should be paid to Norfolk immediately.  The Court found that the Code does not adopt the interline trust doctrine and no special federal interest justifies the creation of federal common law on the subject.  In the absence of applicable state law, interline funds are not subject to a trust.

Estate of Spiritos v. One San Bernardino County Superior Court Case Numbered SPR02211
--- F.3d ----, 2006 WL 933405 (9th Cir. Apr. 12, 2006)
Holding:  Creditor of a bankruptcy estate does not have standing to bring a claim on behalf of the estate without first obtaining authorization from the trustee.  Plaintiff filed a complaint alleging that numerous parties had conspired to conceal assets belonging to her husband’s bankruptcy estate.  The Court found that these claims were being asserted on behalf of the estate, and § 323 vests in the trustee the exclusive right to sue on behalf of the estate.  The Court also noted that the Code provides a mechanism – abandonment under § 554 – for a creditor to acquire property of the estate and that, if the trustee is guilty of malfeasance, the proper remedy is removal under § 324.


Colton v. Verola (In re Verola)
--- F.3d ----, 2006 WL 1029641 (11th Cir. Apr. 20, 2006)
Holding:  Restitution obligation imposed on Debtor as part of state criminal sentence is non-dischargeable, even when the restitution payments flow through a governmental entity to non-governmental victims.  Section 523(a)(7) excepts from discharge a debt for a fine, penalty or forfeiture payable to and for the benefit of a governmental unit.  Debtor argued that the restitution obligation was not for the benefit of a governmental unit because it ultimately was paid to non-governmental victims.  The Court disagreed, relying on the reluctance to interpret the Bankruptcy Code to invalidate state criminal judgments and relying on Kelly v. Robinson, 479 U.S. 36 (1986), which stated that “§ 523(a)(7) preserves from discharge any condition a state criminal court imposes as part of a criminal sentence.”